House panel OKs covered bonds bill

WASHINGTON (Reuters) - A House of Representatives panel on Wednesday approved a bill designed to create a market for covered bonds, instruments that offer banks a way to raise money for new mortgages, while providing investors more options for highly rated securities.

The House Financial Services Committee approved the bill by on a largely bipartisan 45-7 vote.

The legislation aims to establish a regulatory framework for covered bonds, which are securities issued by banks and backed by pools of loans.

Banks issuing covered bonds would have to hold onto the underlying loans, a feature that proponents believe would make the finance system safer, because banks would have a clear incentive to make sound loans.

The legislation indicates the types of asset classes -- not only home mortgages, but also credit card, car and student loans -- that would be eligible collateral for covered bonds issuance.

The White House supports the bill, but prospects for passage in the Senate, where there is no companion legislation, is uncertain.

Covered bonds could provide an avenue to lessen reliance on the asset-backed securities market that underpins much of U.S. finance. In Europe, covered bonds already play an important role in real estate funding.

The bill has yet to win favor from the Federal Deposit Insurance Corporation. FDIC Chairman Sheila Bair has repeatedly expressed unease that her agency's deposit insurance fund could be put at risk if the debt instruments default.

Some lawmakers raised similar concerns during the committee's consideration of the bill.

"Covered bonds should be free of implicit and explicit government guarantees," said the ranking Democrat on the committee, Representative Barney Frank of Massachusetts. "We should give no impression -- and do nothing to impair -- the FDIC of the ability to recover its funds."

The American Securitization Forum, an industry lobbying group, expressed support for the bill and said covered bonds could help restore credit markets.

"This important piece of legislation will work to ensure that private capital can once again flow into our nation's consumer credit and small business sector," ASF Executive Director Tom Deutsch wrote in a letter to lawmakers on the panel. The debt instruments and securitization have the ability to co-exist and complement one another, Deutsch said.